Paper Trail

One day in the middle of March 1699, the Warden of His Majesty’s Mint received a letter in his rooms at the Tower of London. It concluded,

O dear S[i]r nobody can save me but you O God my God I shall be murderd unless you save me O I hope God will move yor heart with mercy and pitty to do this thing for me.

It was signed, piteously,

I am Yo[u]r near murdered humble Servt

W. Chaloner.

William Chaloner was a prolific counterfeiter who had, in fact, been condemned to die within a few days. But the most curious fact about this letter was the man to whom it was addressed: Isaac Newton, the man who worked out the laws of motion, invented calculus, and essentially founded modern science. A notorious counterfeiter and the greatest mind of his age may seem like exceptionally unlikely correspondents, but their lives came to be deeply intertwined. Their encounter reveals, among other things, the perils and rewards on offer at the moment when England was (accidentally) inventing the modern idea of money.

Newton’s role in that revolution is not widely known, but for more than 30 years he was partially responsible for managing England’s money supply, a task he assumed with his appointment as Warden of the Mint in 1696. The job was supposed to be a sinecure, a reward for his brilliance bestowed on him by his political connections. It turned out to be one of the most demanding tasks Newton ever undertook–in large part because in 1696, England was on the verge of national bankruptcy.

The threatened disaster derived from two causes. First, England’s silver coins–the basic units of everyday economic exchange–were disappearing, because they were worth more as silver ingots to buy gold or goods on the European continent than they were as currency at home. By 1696, according to Newton’s measurements, legitimate money was down to half its legal weight, debased by the efforts of “clippers” who harvested silver from coins slice by slice. And fully 11 percent of England’s coins were fakes. At its worst, the shortage of silver coins threatened to bring daily commerce to a halt.

At the same time, the Nine Years’ War with France was consuming up to 80 percent of all government income, forcing the government to try an extraordinary range of new, complex, and sometimes plain weird financial ideas to raise the sums needed to keep King William’s armies in the field.

The effort to fund that debt in the face of the drastic shortage of hard cash turned the mid-1690s into perhaps the first golden age of financial engineering. Of all the expedients tried, the strangest were malt lottery tickets, a financial chimera invented in 1697.

In that year the government wanted to raise 1.4 million pounds–more than $300 million in current money. But with a previous issue of an early form of government bonds already in default, backers for a simple loan were difficult to recruit. So the Treasury came up with a new twist. Tickets costing 10 pounds each were entered in a drawing for cash prizes of up to several hundred pounds. At the same time, the tickets served as both bank notes and bonds. They could legally be passed as 10-pound notes. Or they could be held as interest-bearing coupons, earning one farthing a day–a return backed (in theory) by a tax on malt (which is to say, on beer).

The Bank of England had issued nominally gold-backed paper notes in 1694, but this was a step closer to true fiat money. No certain promise of precious metal appeared in the scheme. As it turned out, it was a failure–fewer than 2,000 of the 140,000 tickets were sold. But the power–and danger–of what those pieces of paper represented sparked a ferocious debate on whether or not it was a good idea to create a mechanism of exchange unconnected to any tangible, physical commodity.